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Accessing China: New QFII rule changes and A-Share inclusion

March 7, 2016

In the first week of February 2016, China’s State Administration of Foreign Exchange (SAFE) announced some key Qualified Foreign Institutional Investor (QFII) rule changes created to ease restrictions on foreign investment in China A shares and bring the rules more in line with the RQFII scheme. FTSE Russell has welcomed this announcement as a major step forward for market access and capital repatriation.

The table below summarizes the key QFII rule changes. They apply to foreign investors who already have QFII licenses – investors without a QFII license need to apply for one from the China Securities Regulatory Commission (CSRC). Whether the CSRC intends to improve the process/time it takes to gain a QFII license, at this stage remains unknown.

Some of the restrictions remain unchanged. For example, QFIIs cannot repatriate more than 20% of previous year end’s total assets each month. The issue of the settlement cycle of A-shares being inconsistent with prevalent international best-practice is also not addressed with these new rules. No RQFII scheme changes were mentioned in the SAFE announcement.

As part of the 2015 Country Classification Review, FTSE Russell stated that China A shares would remain on the FTSE Watch List for possible inclusion in Secondary Emerging, as the market did not meet the required capital mobility and settlement and clearing criteria. However, the welcome SAFE rule changes will be raised by the FTSE Country Classification Advisory Committee ahead of the formal interim update in March 2016.

While the standard FTSE global benchmarks are yet to incorporate China A shares, in 2015 FTSE Russell launched the FTSE Global China A Inclusion Index Series as a set of transitional tools providing market participants with a choice of how to include China A shares in global benchmarks. The allocation of China A shares is adjusted proportional to the changes in the approved quota and is in line with the accessibility available to international investors, or can be customized based on a market participant's specified QFII/RQFII allocation. This approach covers not only the currently available quota schemes (QFII and RQFII), but also those from any other existing and future schemes that increase market access, such as the Shanghai-Hong Kong Stock Connect program. Market participants who do not wish to have China A shares in their global benchmarks can continue to use the FTSE Global Equity Index Series, which will remain unchanged.

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